a. Assume that 80 percent of the units completed in April are sold in that month. What will be the difference in reported profit between the two approaches?

b. Which approach is most appropriate from a conceptual standpoint?

c. Senior managers at Western Beverage receive monthly bonuses determined as a percent of profit in excess of a targeted level of profit. Which method will they favor?

The product sells for $16 per gallon, and in recent months the company has had sales of more than 525,000 gallons per month. Consumers mix 1 part syrup with 5 parts water to make a drink that "replenishes vital bodily fluids following exertion."

At the start of April, there were 200,000 gallons in beginning Work in Process. The product was 100 percent complete with respect to material and 50 percent complete with respect to conversion costs. During April, 500,000 gallons were started. Of the 700,000 units to account for, 100,000 gallons remained in process at the end of April. These units were 100 percent complete with respect to material and 20 percent complete with respect to conversion costs; 300,000 gallons were completed during April and, unfortunately, 300,000 gallons were lost owing to worker error.

The production process calls for sodium to be added at the start of the process. On two separate occasions, a new worker added too much sodium, and batches were ruined. The errors were not identified until the end of the production process when batches were tested for quality assurance. Needless to say, the worker was fired. The controller of Western Beverage, Gunther Bergman, is considering two ways to treat the cost of the "lost" units. One approach is to "bury" the cost in the units completed and the units in process. This would result in cost of units completed of $1,669,000 and cost of ending Work in Process of $222,600 calculated as follows.

Tech-Tonic Sports Drink Syrup

Production Cost Report

April

Quantity Reconciliation

Units in beginning WIP (100% material, 50% conversion costs) .......... 200,000

Units started ....................................................................... 500,000

Units to account for ............................................................... 700,000

Units completed .................................................................. 300,000

Units in ending WIP (100% material, 20% conversion costs) .............. 100,000

Lost units .......................................................................... 300,000

Units accounted for ............................................................... 700,000

Cost per Equivalent Unit Calculation

A second approach involves identifying the lost units for April. The result is a cost of units completed equal to $879,000, cost of Work in Process equal to $122,600, and cost of lost units equal to $879,000, which will be charged to Cost of Goods Sold.
Tech-Tonic Sports Drink Syrup
Production Cost Report
April
Quantity Reconciliation
Units in beginning WIP (100% material, 50% conversion costs) .................. 200,000
Units started .............................................................................. 500,000
Units to account for ...................................................................... 700,000
Units completed .......................................................................... 300,000
Units in ending WIP (100% material, 20% conversion costs) ...................... 100,000
Lost units .................................................................................. 300,000
Units accounted for ....................................................................... 700,000
Cost per Equivalent Unit Calculation

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Overhead Material Labor Total Cost $ 260,000 $ 50,000 $110,000 Beginning WIP Cost incurred during April $100,000 1,623,000 450,000 373,000 800,000 Total $1,883,000 $560,000 $423,000 $900,000 Units Units completed Equivalent units, ending WIP Total 300,000 300,000 300,000 100,000 20,000 20,000 320,000 400,000 320,000 Cost per equivalent unit $1.40 $1.32 $2.81 $5.53 Cost Reconciliation Total cost to account for $1,883,000 Cost of completed units transferred to Finished Goods (300,000 x $5.53) Cost of ending WIP Material (100,000 equivalent units x $1.40) Labor (20,000 equivalent units x $1.32) Ovrhead (20,000 equivalent units x $2.81) $1,659,000 $140,000 26,400 56,200 222,600 $1,881,600 Difference due to rounding 1,400 Total cost accounted for $1,883,000 Total Material Labor Overhead Cost Beginning WIP Cost incurred during April $110,000 450,000 $560,000 $ 50,000 373,000 $ 260,000 1,623,000 $100,000 800,000 $1,883,000 Total Units Units completed Equivalent units, ending WIP Lost units Total Cost per equivalent unit $423,000 $900,000 300,000 100,000 300,000 300,000 20,000 300,000 620,000 300,000 20,000 300,000 620,000 700,000 $0.80 $0.68 $2.93 $1.45